Analyst Jason Alder commented today, NetApp topped consensus on the top and bottom lines by $33.6 million and $0.10, respectively, and guided the fiscal second quarter roughly in line with consensus, despite a constrained macro and IT spending environment. Management highlighted progress in the business's transformation, as strategic products (mostly Clustered Data ONTAP and all-flash arrays) contributed to 61% of product revenue (same as a quarter ago) and grew 24% year-over-year, while the mature portfolio (mostly OEM and ONTAP 7) declined 24% (versus a 40% decline in the previous quarter). Overall product revenue was roughly flat year-over-year—the best performance in 12 quarters—though this was against a very easy comparison and guidance for next quarter implies a double-digit year-over-year decline in product sales. Looking ahead, management expects strategic products to drive moderate revenue growth in fiscal 2018 (as mature solutions become less of a headwind), though we continue to model a moderate revenue decline. While NetApp is managing expenses well, product gross margin continues to be challenged, and we see significant execution risks ahead as competition intensifies in all-flash storage, and as cloud-based and hyperconverged alternatives encroach on the traditional storage market. We would need to see more evidence of product revenue growth together with stability in product gross margin before revisiting our rating.

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